Estimated reading time: 6 minutes
by Lorenzo Raffo
Slowly the new type of Italian government bond takes shape: from Friday it has been known that it will expire 10 years and that it will provide three steps – one initial and two subsequent – in its “step-up” structure. Now we expect to know the initial rate and above all the possible desirable additional premium with respect to equivalent deadlines. Meanwhile, doubts about its real convenience are circulating, although hidden by the “stable order” that at this moment the Treasury needs, as never before, to find resources on the market. This is true but technically Bond today, which is only on the side of the investors, must ask some questions, the same ones that are already advancing quite a few independent observers. We summarize them in some useful objections for those who have to decide whether to put the BTP Futura in their portfolio from Monday 6 July.
- Too long for … – The main reason for recall lies in the indexation to GDP, however, relating only to the so-called final reward of loyalty. A slogan has been made, but to think that such a long and uncertain recognition can play a decisive role in assessing the convenience or otherwise seems unlikely. With a fork from 1 to 3% final, it translates into a “bonus” of 0.1 to 0.3% per year, modest to become attractive on such a long deadline. In the face of an average volatility of the BTPs now higher than the safety standards, the amount of the premium will be amply compensated by a not exaggerated active management of “buy” and “sell”.
- Volatility precisely – This factor represents the reason for the greatest uncertainty, since structurally the increasing rate bonds are subject to high variations in prices due to various factors but above all to monetary policy tensions. It is true that the new product was born in a very particular phase but no one can exclude (indeed we must all hope!) That within ten years the ECB will modify its guidelines several times, causing strong volatility on an instrument such as the BTP Futura.
- Unattractive structure – All of this occurs with respect to a type of bond with increasing rates, generally little appreciated on the secondary, especially in the context of the euro, more stingy in terms of redemptions. The “step-ups” have always been considered bonds by specialists and the BTP Futura will certainly not change this assessment.
- The rate increase – The market is talking about three steps of the “step-up” but in reality there are two: in the fifth and eighth years. So for the first four years (decisive for the success of the initiative) it will be a fixed rate, albeit structured on a clearly longer deadline. Today a decade spans from 1.36% (Btp 3.5% 1/3/2030) to 1.45% (1.65% 1/12/2030). Hence assuming a 1.4% as initial gross coupon would be consistent with what is happening, although in reality a “step-up” should start from a lower value and then tend towards higher levels than the yield of an equivalent maturity at the time of ‘debut. Given the need of the issuer to raise capital from the markets, the 1.4% hypothesis – also considering the precedent of the Btp Italia 2025 – is however unrealistic and the decisive factor of lesser or greater success will consist in the additional rate amount of the two successive steps. Everything will then depend on a desirable additional premium but the current situation – in a market doped by the ECB – does not appear encouraging from this point of view.
- Why two steps? – The choice of a “step-up” with only a double coupon increase is not very brave. To assume an increase every year would have been illogical but at least every two years much more attractive. There are so few progressive rates on the market if there are few on the market and the option goes against the current, which in a situation such as the current one does not appear seductive for the investor, unless there is some unexpected surprise that may change the valuation.
- Competition at home – Inevitably, the question of whether it is not convenient to prefer, in a very uncertain context such as the one in progress, the Btp Italia 2025 (Isin IT0005410912), which makes today between 1 and 1.05% per annum, returns the most favorable indexation to national inflation, rewarding in the long term compared to a correlation with the GDP (and only the final), or even the Btp € 1 2030 (Isin IT0005387052), which can be bought under 95 euros but which provides for the indexation to European inflation, in perspective much more rewarding compared to the final “gift” of the BTP Futura.
- Betting is lawful – The aspects of uncertainty are not few but logically the definitive evaluation will be possible when the initial coupon and the value of the subsequent ones are announced. Only a bold choice – with a nice premium over current yields – could reverse the first flow of known news on the Btp Futura and it is not excluded that this will happen, as already happened in the case of the last Btp Italy. We therefore wait for the most awaited lid to rise. In the meantime, let’s try to hypothesize an initial coupon value: it must be at least 1.6% and even better if it is 1.8%. Now all that remains is to wait for Friday 3 July when this final aspect will be revealed.